by Joe Murphy, CCEP
The chief ethics and compliance officer (CECO) and other C&E professionals can face a tough job. In normal times much of their work can be perceived as unwelcome or interfering with business plans. And in the toughest times it can require them to stand up to those with real power in the company[1] where they work. In a test of strength with those who have power and are also intent on wrongdoing, what can be done to strengthen the position of C&E professionals by protecting them from retaliation for standing their ground?
The focus here is not simply to protect the C&E people for their personal benefit. It is also to protect the company and those it impacts. If C&E people are in weak positions it is less possible for them to protect others – workers, customers, investors and the public – from corporate crime and misconduct. With appropriate protections it is more likely that misconduct can be stopped in its tracks before others are injured.
While termination is typically the first threat that comes to mind, there are other ways to undermine a CECO’s effectiveness. The protections discussed below would apply to termination, suspension, discipline, or substantial diminution of authority, resources or compensation.
Here are some suggestions to address these risks.
In many if not most parts of the world, employees have a contractual relationship with their employer; in the US it is mostly employment at will. However, even in the US certain highly valued employees will have employment contracts. These can provide for such things as prior notice of any action against the person and fixed employment unless the employer can establish just cause for firing, discipline, or diminution of authority or resources. There could also be a right to appeal adverse employment decisions to the board.
The contract can also provide that the CECO is entitled to independent legal representation, and that the company will cover the CECO’s counsel fees if there is a dispute with the company.
For publicly traded companies certain circumstances and events are matters of mandatory public notice. The securities laws could be amended to require that the termination of a CECO, or significant diminution of a CECO’s compensation or authority requirse a filing such as an 8K. Of course, given the ingenuity of corporate counsel, it would have to be clear that this could not be avoided simply by having a nominal CECO with no power, no responsibility, and no circumstance where they would be removed; either having a leashed CECO, or refusing to have anyone as a CECO should not be a route around such a reporting requirement.
A company could require that any decisions regarding the CECO be approved first by the board or the board committee to which the CECO reports. No adverse actions against the CECO could be implemented without this approval. The CECO would also have the opportunity to appear before the board or board committee.
The board could adopt a binding resolution adopting the C&E program and empowering the CECO. It could cover the requirement for prior board approval mentioned in 3 above, plus other empowering elements. The resolution could adopt the SCCE Code of Professional Ethics for C&E Professionals[2] requiring the CECO to follow SCCE’s standards and thus empowering the CECO and other C&E professionals to do so. At the same time, the board could revise the company’s code of conduct to protect and bar retaliation against those who follow their professional standards. These SCCE standards could be very empowering for C&E professionals.
One of the hallmarks of the C&E profession is networking. It is implicit in the USSGs, referring to the expectation that C&E programs will be at least as good as industry practice. Networking goes back to the reaction to the major defense scandals in the 1980s and the establishment of the industry compliance group known as the Defense Industry Initiative. It is essential that C&E professionals have the ability to network with others in their profession. This allows continued growth and exposure to new ideas that can enhance a C&E program.
Networking, however, is also an important element of protection and empowerment for C&E professionals. This allows C&E people to have a fallback route in case they are fired for doing the right thing. The better their network is, the more chance that they can land elsewhere on their feet. Allowing the CECO and other C&E professionals to network and participate in C&E organizations and activities can increase the CECO’s sense that he or she has possible employment options elsewhere, just in case that is needed.
DOJ and other enforcers and regulators can make it clear that a CECO leaving a company or being reduced in position/power will raise questions in the government’s evaluation of the company’s C&E program. Of course, there may be many legitimate reasons for turnover, but it puts companies on notice that retaliation against C&E professionals is never risk free.
A focus on the CECO should not overlook all the others in companies who do C&E work. Any of the methods suggested for the CECO can be extended through the CECO to other C&E people in the company. For example, it can be required that any adverse treatment of a C&E person have the prior approval of the CECO. In fact, all evaluations of C&E people could be contingent on the CECO’s agreement. Taking negative action against a more junior C&E professional without the CECO’s agreement can be considered as an adverse action against the CECO, triggering all the elements listed here.
CECOs need to be real officers, and not just middle managers with an “officer” title. As such they should have the protection of indemnification and D&O insurance that would accompany a real executive officer. This also helps assure CECOs that they will not be cut lose when trouble arises. CECOs need to feel free to resist improper conduct and raise issues. If the issues raised reach litigation the CECO should be no more exposed to costs than any other senior officer.
It could be required that auditor letters include an opinion on the protection and independence of the CECO. This could add another voice supporting the need to protect the CECO and other C&E professionals in the company.
Lawyers are likely to play a prominent role in corporate management decisions, and would certainly be involved in matters relating to corporate wrongdoing. The legal profession, like the rest of us, should have a focus that includes preventing corporate misconduct. Given the essential role of the CECO in preventing such misconduct, and the inherent ambiguity in working for an organizational client, lawyers’ ethical standards could be updated to make it clear that company counsel has a duty to support C&E professionals, and not take the side of other senior officers who want the “compliance troublemaker” out of the company.
It would seem logical to provide financial assurance for the CECO, such that the company would have to pay the person a substantial amount of money if they were fired. However, this is not so simple. First, it puts a specific price tag on the CECO’s role. To management it will appear that the CECO can simply be removed anytime by spending money. In this context it should be remembered that when management elects to pay this money, it does not come from their personal pockets. Rather, they are spending someone else’s money – the shareholders. So the financial cost may not be a great deterrent.
A large severance may also signal to the other C&E people reporting to, and dependent upon, the CECO, that there is a price tag on the CECO. Management can simply write a check, and suddenly all the other C&E people are fully exposed.
Sometimes, putting a price on things changes an equation from a right vs wrong consideration, to a simple commercial transaction. Pay the pesky compliance gadfly and he or she simply goes away.
When a company considers wrongful conduct that harms others as an acceptable part of their Business, we need people inside who will stand up and say “no.” We need CECOs and C&E professionals inside companies to do this. By providing reasonable protection for them we enhance their ability to do their difficult work and help protect all of us from the harm that can follow from corporate misconduct.
[1] “Company” and “corporate” here covers any type of organization, including businesses, non-profits, government agencies and universities.
[2] https://www.corporatecompliance.org/publications/library/code-professional-ethics-compliance-and-ethics-professionals
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